She told investors at a Queenstown presentation last week that the facility would be used to store domestic gas that Contact could not readily use but was obliged to take under the stricter take-or-pay conditions for such new fields as Pohokura.

The Ahuroa storage facility might also be used to store imported gas, if Contact and Genesis decide to proceed with liquefied natural gas or compressed natural gas imports, she added.

Contact still doubts whether enough indigenous gas can be found to replace reducing domestic supplies. If New Zealand does not find sufficient indigenous gas in the next few years, then a storage facility would make gas imports more feasible, Kelly said.

"LNG and CNG may be an even more extreme form of the fixed take contracts we are seeing today in the domestic gas market," she said.

In the local market, new gas fields had now largely replaced Maui, and post-Maui gas contracts were inflexible and more expensive, with all new gas essentially priced the same, according to Kelly.

The Maui field had provided virtually unlimited flexibility at no cost but new gas contracts had little ability to "bank gas", meaning there would be less gas available to cover unexpected supply disruptions, she said.

As Contact's total annual gas cost was more than $NZ400 million ($A345 million), extracting appropriate margins from each gigajoule of gas used was critical, Kelly said.

As the remaining Maui gas reserves reduced, then markets would increasingly place a cost or value on flexibility, and Contact could tap into this opportunity through the proposed Ahuroa storage facility, she said.

According to Kelly, Australia, with a total gas demand of about 880 petajoules per year, had five gas storage facilities capable of storing about 5.6% of demand.

By contrast, New Zealand used about 170PJ of gas per year, but had no storage facilities.

The proposed gas storage project involves using a combination of additional gas, compression and new wells to repressure a near-depleted underground gas reservoir so that it can store gas.

Kelly said Ahuroa had all the necessary requirements to be a good underground storage facility.

Ahuroa has reservoir integrity and well defined closure with low risk of loss; a relatively homogenous reservoir with good porosity and permeability so that gas can flow at high rates; and it will be capable of receiving large injected quantities with minimal compression.

Contact plans to spend about $NZ150 million developing the gas storage project. The required volumes of gas would be about 10-15PJ, with initial injectibility rates of around 170 terajoules per day.

Origin will project manage the project implementation and will operate the facility for Contact, but Contact will direct all design and construction decisions.

The storage project will be developed in two phases. The trial phase, covering the next couple of years, will involve the suspension of production from Ahuroa and the reinjection of gas from the nearby Tariki field.

The implementation phase will require the design of the storage facilities, the determination of the location for the plant, compressors and pipelines, with resource consents obtained to enable commercial operation during 2010.